NY Court quashes attempt by Interactive Brokers’ clients to file amended complaint about improper account administration

Maria Nikolova

Judge George B. Daniels has denied a motion by the plaintiffs to submit an amended complaint against the broker saying that the proposed amendments would be futile.

Heather Hauptman and Timothy Moss, plaintiffs in a case targeting online trading major Interactive Brokers LLC, suffered a heavy blow on Friday, October 19th, as Judge George B. Daniels of the New York Southern District Court denied their motion to file an amended complaint against the broker.

Let’s recall what the case is about. Interactive Brokers’ clients brought a putative class action against their former broker-dealer, alleging that the company breached its contractual obligations by including certain exchange traded notes (ETNs) in their portfolio margin investment accounts.

In July this year, the plaintiffs sought to file an amended complaint claiming they had specified how and when they and Interactive Brokers established contractual agreements via the Portfolio Margin Disclosure Statement and other documents (the “2014 Agreements”) that prohibited Interactive Brokers from applying portfolio margin to ETNs.

Putting it otherwise, the plaintiffs tried to change their strategy by arguing it is not the Customer agreements that are at the heart of their claims. Rather, the broker’s clients alleged that additional promises and commitments by Interactive Brokers were made in 2014 and that these “exceed those imposed by FINRA.” The plaintiffs’ new claims alleged that the parties’ Disclosure Statement was supplemented and amended by the 2014 Agreements that specifically promised and agreed that Interactive Brokers would not include ETNs in its portfolio margin accounts, and thereby Interactive Brokers subsequently breached its agreements when it did so, resulting in substantial losses for the plaintiffs and other putative class members.

FINRA Rule 4210 was said to no longer be the predicate for the plaintiffs’ claims. The plaintiffs’ new claims arise from Interactive Brokers’ decision to implement Article 2175, which specifically agreed to stop trading ETNs in portfolio margin accounts without regard or reliance on FINRA rules or regulations.

The plaintiffs alleged that by providing portfolio margin’s risk-based margining treatment for open positions in ETNs and options on ETNs – such as the VXX – the broker breached its contractual agreements with its customers.

Judge George B. Daniels, however, did not find these arguments convincing and, on Friday, nixed the plaintiffs’ motion to file their amended complaint. The Judge explained that the proposed amendments would be futile.

Interactive Brokers’ customers asserted that their new “breach of contract claims now rest upon the theory that additional promises and commitments by Interactive Brokers made in the 2014 Agreements exceed those obligations imposed by FINRA.” However, the Judge noted, neither the Disclosure Agreement nor the 2014 Agreements indicate that Interactive Brokers agreed to assume obligations beyond those imposed by FINRA. According to the Judge, Interactive Brokers’ provision of the Disclosure Agreement to potential customers simply reflects its compliance with FINRA rules.

Because the 2014 Agreements, at most, reflect Interactive Brokers’ commitment to comply with FINRA’s decision, the 2014 Agreements do not impose any obligations on the broker in excess of those imposed by FINRA, the Judge said in his Order.

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